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The Therapy Sessions
Sunday, May 04, 2003

One of the most difficult jobs of the Iraqi reconstruction is going to be dealing with the oil. People who write newspapers generally believe that oil is an endowment through which a country makes life better for its citizens using huge government spending programs.

These people need to reconcile that idea with the facts on the ground.

The facts? Only ONE major oil-exporting country respects human rights (it is Norway).

All of the others have major problems with repression. One need not dwell on the Middle East. Saudi Arabia is an extreme case, but its abhorrent human rights record is common in the region.

It is not necessarily culture-based. The problem presents itself in African Nigeria (where the government blatantly represses local people to extract a government-owned commodity) and South American Venezuela (where Hugo Chavez is trying to rewrite the constitution so that he can be ruler for life).

I think oil is a curse (as much as diamonds are a curse in West Africa).

There are reasons why democracy and oil wealth have difficulty coexisting.

The most difficult aspect of formulating a democracy is the problem of taxation. People (rightly) view taxes as a terrible price to pay for the (usually) meager services of government. Taxes are regressive – they discourage growth – because the people who are most inventive or industrious usually get hit the hardest.

Once a prospective democracy can jump that hurdle without widespread discontent, it is virtually home free: spending money is always more fun than extracting it.

But that hurdle is vital. This is where all members of society – mothers, retirees, indigents, young people, people who inherited wealth, industrious people who earned it, people who expect to be rich someday – must all come forward and tell society why they should be allowed to keep their money.

It's a painful process. But it's the process on which true democracy is built. True democracy works because when I cast my vote, I am voting for the candidate I believe will most responsibly spend my tax money. I have a stake in the outcome of the election, and there are meaningful differences between the parties.

In an oil-rich state, this important process – the process of determining what tax fairness means – never takes place (and as result, other important processes never start: the most important question in Iraq is "who owns what?" Iraq's understanding of property - particularly private property - is lost in a socialist time warp).

Oil states' ability to spend money is limited only by their ability to dream. Great buildings are built, universities are endowed, generous benefits are bestowed.They all belong to the people.

But eventually, a central truth becomes apparent: government spending doesn’t relieve wealth disparities in societies. It doesn’t make people become engineers, it can't buy ambition and extra funds don’t create entrepreneurial initiative. As a result, the rich stay rich, the poor stay poor (even with generous government help), the economy stagnates and the social immobility leads to frustration.

This is the situation in the Middle East today.

Governments like Saudi Arabia – which generously subsidize their underclass but never eliminate it– are trying to stave off a future like Venezuela’s. There the poor have elected (and strongly support) a repressive dictator whose stated goal is total wealth redistribution (i.e. socialism - which has an even more dismal track record on human rights than the oil states do).

Oil is a curse because it prevents governments from performing their central function: designing a society that pays for its functions equitably (this is something that even the US can’t do (most people in the US pay NO income tax), but at least this country is debating the issue continuously.).

This brings us to Iraq and it's tremendous oil reserves.The natural tendency is to view Iraqi oil as a resource for the Iraqi people. George Bush has said as much, and it sounds great. It shouldn’t be a resource for anyone else, should it?

But my fear is the US will stop here. Working out taxation systems is dirty, contentious work. Even a low, flat rate tax (like Russia has succesfully adopted) is likely to enrage the poor - who are now quite supportive of the Americans. It will make enemies, and it seems unnecessary, particularly to conservatives: the Iraqis have oil. Why should they pay any taxes at all?

If we are going to make such a conclusion, we might as well go home now, for the chances of Iraq having a functioning democracy are virtually nil.

The Iraqi oil revenue should not be a bottomless government commodity. It should be placed in a trust to be privately managed (this will be very tricky, but there are ideas).

The companies that drill oil should be private (not state owned) – which means they will be foreign – but taxed heavily for the privilege of drilling each barrel. The revenue generated should be treated like lottery revenues are treated in the US – used to support schools, help retirees and assist war veterans. Perhaps a portion should be given to each citizen to spend as he or she sees fit (which would make the tax pill less bitter).

But the day-to-day functions of Iraqi government must be supported by tax revenue.

This is the right thing to do. As a consequence, the left will be against it (all the revenue should go into government coffers! The little guy can't be trusted!).Forcing the Iraqis to develop a tax system will be very unpopular with the UN and the international community. The “peace” movement will roll in its grave with all kinds of warnings about capitalism running amok.

Iraqis will protest that they are paying too much and they will blame Americans. They will wonder why an oil-rich country needs to have any taxes at all.

Just like a true democracy.

It will sound wonderful to hear such sentiments finally coming form the Middle East.

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